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Why I’d buy the Associated British Foods share now

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In a year of lockdowns, companies’ financials have suffered a fair bit. Associated British Foods (LSE: ABF) is an example of the trend. The FTSE 100 conglomerate released its results today to unimpressed investors, who dragged its share price down by almost 4%. 

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Retail readies for growth

The company’s revenues are down by 17% and operating profit is down by 46%. This is all down to retail, the biggest contributor to Associated British Foods’ revenues. It owns the hugely popular fast fashion and home goods brand Primark. The retailer’s profits are down a whole 90%!

But it expects things to change fast. After reopening, it expects stores to be “very cash generative” and is optimistic about opportunities ahead. It is also opening new stores in Europe and the US, which can further contribute to its growth. 

Commodity prices drive up profits

Besides this, I think the prospects for its sugar and agriculture segments are promising. Commodity prices have been on the rise, and this is evident in both rising revenues and profits for the segments. 

In sugar, operating profit increased by a whole 633%, driven purely by rising prices. For agriculture, which focuses on animal feed, besides higher commodity prices, higher volume demand from China also helped.

Commodity prices are expected to remain firm for the rest of this year and beyond, and demand is expected to bounce back fast too. Based on this I think we can continue to anticipate healthy growth in both segments. 

Home consumption increases grocery sales

Lastly, let us consider Associated British Foods’ grocery segment. It grew too, as consumers bought more for home. I think this segment, with brands like Twinings and Dorset Cereals, can continue to grow as economic activity improves and associated with that, consumer spending. 

But the Associated British Foods’ share price has run up

In a nutshell, I am quite positive on the Associated British Foods share. However, I do think that there is a cap on how much its share price will rise, at least in the foreseeable future. There are two reasons for this. 

One, its share price has seen an upswing for much of the past year. The November stock market rally was particularly beneficial, as its share price reached pre-market crash levels. I think that leaves little room for it to increase much, unless a broad stock market rally carries it forward. 

Two, its past share price trends leave me diffident, because they have been so erratic. Unless the changes we are seeing are so fundamental that they put Associated British Foods on a super-fast growth path (which can happen), I am not sure if the current share price rally will continue. 

Final assessment

As a macro-investor, though, I am quite bullish on the stock. I think it is in exactly the right businesses to ensure high growth. I would buy it. 

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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